Living capital in Norway – alternative ways of buying a residential property on the rise
Norway's housing market is resilient. There’s been stable and strong house price index growth over the last decade, making residential properties a profitable investment for Norwegians. But it’s also meant that first-time buyers find it increasingly difficult to buy a home, especially in big cities. It’s not surprising that new alternative models to help buy residential properties are on the rise and in demand.
The traditional way of buying a residential property (through a mortgage) doesn’t suit everyone. So several housing developers in Norway have introduced new options:
- discount market sale with a first right to buy for the seller
- joint ownership homes
- rent-to-own homes
The most common options are rent to-own and joint ownership homes. For housing developers to compete in the housing and property sector in Norway, it’s important to at least be aware of alternative sale options and whether they can be a positive implementation. Alternative sale options can be considered as a key ESG factor for housing developers.
Introduction
Requirements for banks and other financial institutions' credit standards have been set by the Norwegian Ministry of Finance, with the purpose of mitigating the build-up of debt in vulnerable households.
In general, banks require 15% equity of a property's purchase amount, and the buyer's total mortgage cannot exceed five times the buyer's income. Regarding the possible mortgage buyers can get, banks also consider an interest rate of at least 7%, with a possible increase of at least 3%.1 As such, these requirements are difficult to fulfil for first-time buyers when prices are high and steadily increasing.
Rent-to-own and joint ownership homes are two housing options that provide both the opportunity for more people to buy their own home, and the possibility for property developers to expand their portfolio. Since investors are increasingly applying non-financial factors as part of their analysis process to identify growth opportunities, offering alternative housing can be seen as a positive and strategic implementation for real estate developers.
Joint ownership homes
In Norway, joint ownership allows buyers to buy a share of a residential property (typically minimum 50%), with a first option to buy the remaining share.
The buyer finances the purchase of its share through a mortgage and pays rent to the housing developer (joint owner) for the remaining share. Since the buyer only needs a mortgage for the share they are buying, getting a mortgage is easier and the buyer doesn’t need as much equity compared to if they were buying the property outright.
During the joint ownership period, the buyer has the option to increase their share. Once the buyer acquires the remaining share, they’ll no longer have to pay any rent as the joint ownership will cease to exist.
Rent-to-own homes
Rent-to-own homes are, in many aspects, like regular tenancies. The main difference is that the tenant holds a call option, which gives the tenant the right to buy the property within a given time (usually either at any time during the lease or at the end of the lease).
The lease term is normally a specified period – for example, three or six years, and the tenant will otherwise pay rent at fair market value.
The tenant's call option relates to a purchase price set when entering into the lease agreement. The tenant will have the benefit of the increment in value, which will also be considered as equity for the tenant if they choose to buy the property. If the tenant does not exercise the call option, the landlord (housing developer) will benefit from the increase in value. Both parties will also bear the risk of any decrease in price.
Challenges – uncertainty related to applicable law
Alternative ways of buying a residential property have their advantages, both for the buyer and for the real estate developers. But there are also challenges with sale alternatives like joint ownership and rent-to-own housing.
Most of the challenges are related to legislation. For example, in Norway, there are two different statutory laws related to buying a property, one for buildings under construction, and one for competed buildings. Since a buyer has more rights under the former law, it’s important to know which law applies in a joint-ownership-scheme. The buyer can buy a share of a property while it’s still under construction, but later – after the building’s been completed and the buyer has moved in – increase the share amount. In this situation, it’s not clear which law applies. And this causes an undesirable unpredictability for both the buyer and the real estate developer.
Another good example is whether the Norwegian Tenancy Act applies for the share the buyer rents under the joint-ownership scheme. The Norwegian Ministry of Local Government and Regional Development has concluded that the Tenancy Act is not applicable in such cases. But the courts may decide otherwise.
Considerations for property developers
Real estate developers should also be aware of the differences in housing tenures in Norway when considering alternative sale options. Ownership of residential property (apartments) is mainly organized as either a housing cooperative or condominium, and there are some differences – for example, regarding stamp duty, limitation of ownership and the right to rent.
Alternative sale options may give rise to tax-related questions and questions related to the need of license/permission from public authorities. Alternative sale options should not be assessed solely based on the details of the specific scheme itself, but also based on other potential financial and real estate factors. An individual assessment should always be carried out for each real estate developer.
Moving forward – economic and social opportunity
There may be challenges, including uncertainty regarding applicable law, with implementing new alternative ways of buying residential properties. But this is to be expected with any new model or scheme in the real estate industry. The Norwegian Tenancy Act is already under revision and may very well clarify the applicability for rent-to-own and joint ownership homes.
New alternative ways of buying residential properties in Norway are in demand and still in their early stages of being developed. So rent-to-own and joint ownership homes can be an economic and socially sound investment for many real estate developers, especially considering Norway's strong property and housing market.
1The Norwegian lending regulation, 2021-01-01.
